The 80/20 Rule as it Applies to ERP Custom Software Development

The eBook recently published by Strategic Systems Group (SSG) is an FAQ resource. It provides in-depth answers to “12 Frequently Asked Questions about Enterprise Resource Planning Systems” for manufacturers. In Chapter 8, we look at custom software development considerations from a variety of perspectives.

The 80/20 Rule as it Applies to ERP Custom Software Development

It’s called the Pareto Principle. Also known as the 80/20 rule, the law of the vital few, or the principle of factor sparsity, it states that, in many situations, roughly 80% of the effects come from 20% of the causes. It is named after Italian economist Vilfredo Pareto, who noted the 80/20 connection 1896 when he discovered that approximately 80% of the land in Italy was owned by 20% of the population.

Since then, the 80/20 rule has been applied to various business processes. So how does it apply to ERP software system implementations? In a nutshell, organizations should aim to get at least 80% of the functionality they need right “out of the box”. In other words, 80% of the required functionality would be obtained without making any system modifications. But what about the remaining 20%?

The implementation team would then look at what to customize to address the remaining 20% of the equation. Customization is costly, so the goal is to keep it fairly limited (tight in scope). Bear in mind that modern ERP systems are built to subscribe to industry best practices. That’s why, over time, the need for custom development has decreased. Thus, it’s more than worthwhile to see how the new system tackles your standard business processes, as opposed to customizing the new system to fit the way your business processes have always been handled in the past. Keep an open mind! Let your mantra be: Change is good!

Third-Party Applications

Now let’s look at the role and the impact of third-party applications.

Virtually all major ERP solutions have an ecosystem of third-party applications built around them. These apps augment the core functionality of the software publisher’s ERP solution. Third-party packages often meet specific, unique industry needs such as credit card processing, equipment rental, barcode scanning, or EDI. This is another factor that has reduced the necessity for costly, time-consuming custom software development.

Custom Software Development and Upgrades

We would be remiss if, in this chapter, we did not mention one of the drawbacks of custom software development. As clients upgrade from version to version of the main publisher’s software, the custom software development that was done along the way actually becomes a hindrance. This is because all those customizations must be carried forward into the new version. This effectively increases the cost of the upgrade. In some cases, carrying the upgrades forward is justified and cost-effective for the organization. In other cases, it is more cost-effective for clients to follow the system’s base functionality, thereby alleviating the need to carry customizations forward to subsequent release versions.

To learn more about the PROs and CONs of ERP software customizations …